Is It Better to Promote From Within?

Business owners and managers choosing whether to hire from outside or promote from within, consider this: new hires earn more when they start than their established counterparts, but they perform less satisfactorily than insiders.

In a new study conducted by Matthew Bidwell, an assistant professor at the University of Pennsylvania's Wharton School and published recently in the journal Administrative Science Quarterly found that external hires get paid 18% to 20% more than internal employees do for the same job, and they get lower marks in performance reviews during their first two years on the job.

Not only were outside hires more expensive, but they were also 61% more likely to be laid off or fired from that position and 21% more likely than internal hires in similar positions to leave a job on their own accord, Dr. Bidwell found.

“External hires tended to have more education and experience than internal counterparts, but those credentials didn't always result in strong performance, especially in a new company culture,” said Dr. Bidwell. By contrast, employees promoted from within have valuable firm-specific skills that can translate into better performance and reviews.

Dr. Bidwell said that external hiring has become more prevalent in the past three decades, especially in large organizations and for high-level positions. But he said that companies should spend more time figuring out how to promote from within.

Hiring managers may be tempted by a fresh perspective or a prestigious résumé, but they "underestimate how hard it is to integrate new people," he said.